Circuit City 2004 Annual Report Download - page 29

Recent Accounting Developments
In November 2004, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standards ("SFAS") 151, "Inventory Costs, an amendment of ARB No. 43, Chapter 4." SFAS 151 clarifies that
abnormal inventory costs such as costs of idle facilities, excess freight and handling costs, and wasted materials
(spoilage) are required to be recognized as current period charges. SFAS 151 also requires that the allocation of fixed
production overheads to the costs of conversion be based on the normal capacity of the production facility. The
provisions of SFAS 151 will be effective for fiscal years beginning after June 15, 2005. The Company is currently
evaluating the provisions of SFAS 151 and does not expect that the adoption will have a material impact on the
Company's consolidated financial position or results of operations.
In December 2004, the FASB issued Statement of Financial Accounting Standards 123 (revised 2004) (SFAS 123R),
"Share-Based Payment". SFAS 123R replaced SFAS 123, Accounting for Stock-
Based Compensation (SFAS 123), and
superseded Accounting Principles Board Opinion 25, Accounting for Stock Issued to Employees. SFAS 123R will
require the Company to expense share-based payments, including employee stock options, based on their fair value.
The Company is required to adopt the provisions of SFAS 123R effective as of the beginning of its first quarter in
2006. SFAS 123R provides alternative methods of adoption which include prospective application and a modified
retroactive application. The Company is currently evaluating the available alternatives of adoption, of SFAS 123R. The
Company believes the adoption of SFAS 123R will have a financial statement impact which could be significant.
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In December 2004, the FASB issued FASB Staff Position (FSP) 109-1, "Application of FASB Statement No. 109,
Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs
Creation Act of 2004." FSP 109-1 states that qualified domestic production activities should be accounted for as a
special deduction under SFAS 109, "Accounting for Income Taxes," and not be treated as a rate reduction.
Accordingly, any benefit from the deduction should be reported in the period in which the deduction is claimed on the
tax return. The company is currently evaluating the effect that the deduction, if any, will have in subsequent years.
In December 2004, the FASB also issued FSP 109-2, "Accounting and Disclosure Guidance for the Foreign Earnings
Repatriation Provision within the American Jobs Creation Act of 2004." FSP 109-2 provides guidance under SFAS
109, "Accounting for Income Taxes", with respect to recording the potential impact of the repatriation provisions of the
American Jobs Creation Act of 2004 ("Jobs Act"). FSP 109-2 temporarily allows companies that are evaluating
whether to repatriate foreign earnings under the Jobs Act to delay recognizing any related taxes until that decision is
made. This pronouncement also requires companies that are considering repatriating earnings to disclose the status of
their evaluation and the potential amounts being considered for repatriation. The Company has completed its evaluation
of this legislation and FSP 109-2 and will not repatriate any foreign earnings
Item 7A. Quantitative and Qualitative Disclosure About Market Risk.
We are exposed to market risks, which include changes in U.S. and international interest rates as well as changes
in currency exchange rates (principally Pounds Sterling, Euros and Canadian dollars) as measured against the U.S.
dollar and each other.
The translation of the financial statements of our operations located outside of the United States is impacted by
movements in foreign currency exchange rates. Changes in currency exchange rates as measured against the U.S. dollar
may positively or negatively affect sales, gross margins, operating expenses and retained earnings as expressed in U.S.
dollars. Sales would have fluctuated by approximately $70.0 million and income from operations would have
fluctuated by approximately $1.0 million if average foreign exchange rates changed by 10% in 2004. We have limited
involvement with derivative financial instruments and do not use them for trading purposes. We may enter into foreign
currency options or forward exchange contracts aimed at limiting in part the impact of certain currency fluctuations, but
as of December 31, 2004 we had no outstanding forward exchange contracts.
Our exposure to market risk for changes in interest rates relates primarily to our variable rate debt. Our variable